Global Economic Outlook - October 2018

Summary: From Goldilocks to Deadlocks

Until this year, the global economy had been characterized by three years of strong, synchronized growth with subdued inflation—the “not too hot, not too cold” characteristics of a “Goldilocks” economy. Though global growth is still relatively resilient, inflation risk is clearly on the rise, driven by high commodity prices and tight labor markets.

The outlook for global economy is currently clouded by a series of deadlocks on key issues. Since September’s Salzburg summit, the Brexit negotiation process has turned from bad to worse. U.S. tariffs on $200 billion of Chinese imports and China’s retaliatory tariffs on $60 billion of U.S. goods have contributed to elevated global trade concerns. Italy’s high deficit target will lead to a face-off with the European Union (EU).

Though we are still cautiously optimistic about global prospects, there is a clear growing unease over the handling of these important issues. Hopefully, economics and politics will align to reach productive resolutions.

The following are our views on developments in the major world economies.

United States

  • The Federal Open Market Committee raised the target overnight federal funds rate to a range of 2.0-2.25%. Commentary following the meeting set expectations for another 25 basis point increase in December, and more to follow in 2019.
  • Labor market indicators are very strong, with unemployment well below the level considered to be non-inflationary.
  • Inflation is steady. The deflator on core personal consumption expenditures (excluding energy and food) reached 2.0%, the Fed’s inflation target. Anecdotal evidence of higher costs is emerging, and tariffs will be inflationary in the near term.
  • Real U.S. gross domestic product (GDP) growth in the second quarter was affirmed at 4.2% (annualized). We anticipate measurements for third and fourth quarters to show slower growth, a trend that should continue through 2019.